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On the Latest Housing Numbers

I read Diana Olick's Realty Check blog on CNBC.com on occasion. I must admit that she is considerably more credible and serious than the vast majority of personalities to be found over there. In her latest piece she questions the validity of the sales bump seen in the last three existing home sales reports. She queries Lawrence Yun, NAR's chief economist. He volunteered,

"We have seen some bulk purchases by investors, but we are not picking up that data through the Multiple Listing Service or through our release data, but we do know that there is some bulk purchases by investors who plan on releasing those properties within a year's time, when they see a better market condition."

I don't believe "better" market conditions are coming any time soon. We are just coming off of the best market conditions anyone will see in their lifetime. Those market conditions were predicated upon unsustainable conditions, hence they came crashing down. They are crashing down, not crashed - as in past tense. I believe we have some ways to go. That is why I am not buying real estate, and I believe that those that are jumping in now are jumping in prematurely.

Personally, I don't consider Mr. Yun to be a credible source, either. He may be smart and capable, but the extreme bias of his employer (the ultimate real property perma-bull) and the incredibly biased reports of his predecessor color his opinions by default. He is not nearly as bad as David Lereah (who was literally sensationalist-style perma-bullish) was, but he is still not objective. See The Reggie Middleton Real Estate IQ Test - Who believes the NAR?

This is an excerpt from that post on Tuesday, 08 January 2008

From CNBC.com

Home Sales Seen Holding Steady In Coming Months

Pending sales of existing U.S. homes inched lower in November and should hold steady over the next few months, a real estate trade group said. (I ask, "Why should they do that? Credit is tighter, recession evidence is stronger. Supply is greater, and demand is lower. Hmmm, let me consult the book written by that ex-NAR guru for the answer." )

The National Association of Realtors Pending Home Sales Index, based on contracts signed in November, dropped 2.6% in November, to 87.6 from an upwardly revised 89.9 in October.

Economists polled by Reuters ahead of the report were expecting pending home sales to decline by 0.5 percent from October's originally reported 87.2.

The November number was down 20% from a year earlier.

The pending homes sales data suggests that the volume of sales will hold steady for a while before turning upwards before the end of the year, said NAR chief economist Lawrence Yun.

With all due respect to Mr. Yun, Mr. Lereah and the NAR, anyone swift enough to complete the registration form for this blog should know, by now, to discount this association's data and opinions. They do not do the industry justice with this nonsense. Realtors should actually be the first in the protest line. It is their credibility that is being called into question, for this is THEIR trade group. Credibility is the key!

Notice how accurate that prediction was for 2008! From my blog post that day in 2008:

My take: I believe that my blog's readers are considerably above average in financial acumen and common sense. The NAR is simply not an entity to be taken too seriously, due to the obvious conflict of interest exemplified by their ex-economist, [[David Lereah]], who published some of the most absurd BS I have ever seen come from a nationally reknown organization. Examples of his work from Wikipedia: Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade, And How to Profit From Them was published in February 2005 at just about the tippy top of the bubble (that takes some talent). One year later in February 2006, as the market is already on it's way down, Lereah retitled his book Why the Real Estate Boom Will Not Bust andHow You Can Profit from It. Lereah's previous book The Rules for Growing Rich: Making Money in the New Information Economy touting investment in technology company equities was published in June 2000 at the onset of the collapse of the dot-com bubble. This extreme cheerleading has died down substantially, but the overly optimistic spin is still evident with their new economist, Lawrence Yun.

I actually believe the Case Shiller graph above to be misleadingly optimistic due to my doubts about seasonality filtering and the exclusion of investor related properties (flips, see A reminder concerning popular housing indices) which are dominating the lower end of the market. On this note, Ms. Olick consults someone who I feel is considerably more credible and who I have dealt with personally...

I found that so interesting that I emailed over to Mark Hanson, a housing and mortgage expert out in California. He says the bulk buying was much bigger last year than it is now, and in fact there is no shadow inventory around to buy in California today. Yun says the same: "Interestingly what I hear from Las Vegas, San Diego, Riverside and other areas is they are really desperate for inventory in the lower price range....and even though they have buyers that want to buy there's not enough inventory." Yun put it out there to banks to release anything they have. [Reggie note: Which brings us to the logical argument that supply must meet demand, and pricing must come down significantly to meet the demand at the lower price points. The demand and credit/liquidity at the higher prices points is very, very low.]

But in my chat with Hanson, he said I should be focusing on something else: "Flip Adjusted Sales.'

This is adjusting total sales to back out flips....

"Buy and hold is not the top strategy of these investors," claims Hanson. "It is buy and sell quickly. So unlike any other time in history, the exact same house is being counted twice within a 2-6 month period of time, skewing the numbers. These investors were especially motivated to sell before the end of the tax credit on Nov. 30th -- or thought to be the end -- which is why median and average prices keep falling." [Reggie note: this will not skew the Case Shiller numbers though, for they use an econometric model that filters for just such events, although this filtering introduces other unrealistic biases as well.]

Ms. Olick goes on to state:

"When the investor flips the property, it is not listed as a distressed sale, but as an organic sale [Reggie note: Nearly all flippers buy from distressed owners, so this can be misleading as well]. I don't know if anyone could ever figure out the real "Flip Adjusted Sales" numbers, but as we see more foreclosures come to market in the coming months, we shouldn't underestimate the trend. Right now there are about seven million homes somewhere in the foreclosure process, and banks are moving borrowers through the modification more quickly than ever. No question we will see rising distressed inventory come 2010, and investors will undoubtedly be poised to take advantage."

Well, I agree with Mark (who really, really knows his stuff - he busted Lehman with their overstated inventory very early on as Mr. Mortgage on YouTube), and Diana. As for the ability to find the "flips", it can be done by literally performing the opposite of the Case Shiller index. Look for properties that were held for less than one year, and have different and/or dissimilar names in the most recent transaction in the chain of title - usually from an LLC to personal names. The vast majority of these will most likely be flips. Back those out and you will get a much clearer picture of the organic sales numbers. In terms of the Case Shiller index, add those in and adjust for seasonality, etc. and you will bet a much clearer picture of the direction of actual pricing.

If the flippers and investors are the ones involved in most of the action on the lower end, and most of the action is on the lower end, then the sales price increases reflected by the Case Shiller index are quite misleading.